Canadian dollar touches 7-week low after Poloz extends stimulus

The Canadian dollar fell to a seven- week low after Bank of Canada Governor Stephen Poloz said he would extend a three-year pause in interest-rate increases.

The currency erased a gain versus its U.S. counterpart as Poloz told a House of Commons committee in Ottawa that “substantial” monetary stimulus in place remains appropriate as a weak U.S. recovery damps demand for Canadian commodity exports. The Canadian dollar tumbled by the most since June last week after the central bank dropped a bias toward higher interest rates it had included in every policy statement for more than a year and held the benchmark rate at 1% for the 25th consecutive meeting.

“The Governor’s comments seem to be in line with the tone of the interest-rate announcement that fed into a weaker Canada last week, and plays part and parcel with the move here,” Matthew Perrier, director of foreign exchange at Bank of Montreal, said by phone from Toronto.

The loonie, as the Canadian dollar is known for the image of the waterfowl on the C$1 coin, fell 0.2% to C$1.0465 per U.S. dollar at 3:25 p.m. in Toronto, after touching the weakest level since Sept. 6 at C$1.0506. One loonie buys 95.57 cents.

Currency Weakness

The Canadian dollar has declined 2.2% in October, bringing its losses against nine developed nation currencies this year to 3.7%, according to the Bloomberg Correlation-Weighted Index. The Australian dollar is down 7.8%, and the U.S. dollar has added 2.2%,

Concern about the pace of global demand is delaying growth in exports and investment, and Canada’s economic output is less than policy makers had expected, Poloz said. Inflation will accelerate to the bank’s 2% target by the end of 2015, he said.

“Poloz’s comments were quite similar to the monetary policy report, but taken as a whole are fairly dovish, weighing on the Canadian dollar,” Camilla Sutton, Toronto-based head of currency strategy at Bank of Nova Scotia, said in an e-mail reply to questions. “At the same time as Gov. Poloz was speaking, the U.S. dollar was also broadly strengthening.”

The Bloomberg U.S. Dollar Index rose to the highest level in more than a week before the Federal Reserve policy makers issue a statement tomorrow. The Federal Open Market Committee is forecast to retain $85 billion a month of bond purchases at the conclusion of a two-day meeting.

Options Trade

Trading in over-the-counter foreign-exchange options on the U.S.-Canada dollar exchange rate amounted to $9 billion, the largest share of trades at 21%, according to data reported by U.S. banks to the Depository Trust Clearing Corp. and tracked by Bloomberg.

“Recent indications suggest a lot of activity in the options market with interest closer to the C$1.07-to-C$1.08 level,” Ian Pollick, fixed-income strategist at Royal Bank of Canada’s RBC Capital Markets, said in a note to clients today. RBC forecasts the Canadian dollar to weaken to as low as C$1.08 in the first quarter of next year, according to the note.

Canada’s benchmark 10-year government bonds rose, pushing the yield down two basis points, or 0.02 percentage point, to 2.41%, The 1.5% security maturing in June 2023 added 15 cents to C$92.26.

The Bank of Canada will provide addition details on Oct. 31 about a five-year note auction scheduled for Nov. 6.

Canadian manufacturers’ raw material costs fell for the first time in five months in September, Statistics Canada said today from Ottawa. The raw-materials price index declined 1.5%, the first decline since April, reflecting lower prices for crude oil and vegetable products. Economists predicted a 0.5% decline, according to the median estimate in a Bloomberg survey with six responses.

Futures of crude oil, Canada’s largest export, fell 0.4% to $98.25 per barrel in New York and the Standard & Poor’s 500 Index of U.S. stocks rose 0.4%,